1973 (9) TMI 44 - HC - Income Tax

Capital Expenditure, Earning Income, Expenditure In The Nature, Expenditure Incurred, Income Returned

Summary

Issues:
1. Whether the sum paid by the assessee should be excluded for determining the penalty under section 271(1)(c) of the Income-tax Act, 1961?

Analysis:

The judgment by the High Court of Gujarat involved a reference made by the Income-tax Appellate Tribunal regarding the exclusion of a sum of Rs. 8,750 paid by the assessee to another firm for goodwill in the assessment year 1964-65. The assessee had initially returned an income of Rs. 29,229 but was finally assessed at Rs. 41,050, with the addition of the aforementioned amount. The dispute centered around whether this sum should be excluded to determine if the assessee concealed income under section 271(1)(c) of the Act. The Inspecting Assistant Commissioner imposed a penalty of Rs. 1,500, which the Tribunal set aside based on the contention that the payment was for making or earning income. The Tribunal held that the amount was in the nature of capital expenditure but necessary for income generation, thus eligible for deduction from the total income assessed. The Tribunal's decision was challenged before the High Court.

The first contention raised during the reference hearing was that capital expenditure cannot be reduced from the correct income for penalty determination. The second contention was that the expenses were not bona fide as they were considered a premium for obtaining premises. The High Court rejected both contentions, emphasizing the importance of the Explanation to section 271(1)(c) in determining concealed income. The court highlighted that the legislature allows for the deduction of bona fide expenses, whether capital or revenue, from the correct income assessed for penalty evaluation. The court also noted that the Tribunal had found the expenditure necessary for income generation, thus dismissing the argument against the expenses being bona fide.

In conclusion, the High Court ruled in favor of the assessee, stating that the sum paid should be excluded from the penalty calculation under section 271(1)(c) of the Income-tax Act, 1961. The court directed the Commissioner to bear the costs of the reference. The judgment clarified the treatment of expenses, emphasizing the deduction of bona fide expenses for determining concealed income, irrespective of their nature as capital or revenue expenditure.